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Naphtha Margins Pushing Petchem Profits Higher in 2017

Margin data supplied by Shell to investment analysts show why petrochemical producers continue to ride high. In the third quarter, most other petrochemical sector players joined the energy major in reporting still healthy cracker margins.

Shell is not fully integrated to polyolefins and the cracker picture tells a large part of the story.

Producers moved quickly a few years ago to capture the shale advantage in the US. Shell switched from a heavy feed strategy to one that focused almost entirely on natural gas liquids (NGLs). It joined its peers in looking for the best, in its view, ways of building out advantage over the longer term.

Its new US cracker investment will be in Pennsylvania – the ground and underground works for the project are almost complete – close to Marcellus shale feedstock and the majority of the downstream converter demand, the northeast of the US.

The trick in petrochemicals is to have assets running well at any one time and to be in a position to capitalise on advantaged feedstock and energy costs.

Shell is clearly satisfied with its performance in chemicals and, along with the other oil majors, it sees opportunities in petrochemicals growth in a low oil demand growth world.

One thing this chart of the Shell data illustrates is the way in which liquids cracker margins have improved relative to gas. As the oil price fell from the middle of 2014, the fortunes of producer cracking naphtha and other crude oil based feedstocks improved, in recent years significantly. The shale advantage was not lost but diminished.

This is where balance in the portfolio of cracking and other chemicals assets played a positive role.

Royal Dutch Shell CFO, Jessica Uhl, pointed to the “solid performance” of the chemicals business over the past five years when she spoke to financial analysts on 3 November.

Shell produced record earnings in chemicals in the first quarter of this year. Chemicals earnings in the third quarter, excluding “identified items,” were $650m, up 20% on the third quarter of 2016.

Return on average capital employed was 15% on average over the five-year period. It was 19% in Q3 2017, Uhl said.

“This performance has been delivered across a range of crude and gas prices and demonstrates the robustness of the portfolio at a lower oil price,” she added.

Shell has been able to balance the types of feedstock it uses better. It has had some major problems with plant availability, but Uhl said that operational performance over the period had been better.

Shell’s growth projects now are in Pennsylvania, in Geismar, Louisiana – the investment here is in higher, or alpha olefins – and in China, where Shell and its partner China National Offshore Oil Corporation are to expand their existing Nanhai cracker complex. Shell says that this is the most competitive cracker in China.

The 1.5m tone/year Pennsylvania project will be testing for the company in terms of logistics – it is isolated from the bulk of the US petrochemical industry investment on the Gulf Coast – and possibly in terms of construction costs, which have risen significantly across the sector.

Shell’s most recent announcement on the project, however, said it would move into main construction late this year.

The company emphasises that the site will use ethane from the lowest cost basin in North America to produce polyethylene at world scale.

“It will be the most cost-competitive polyethylene producer in the US,” Uhl said.

“The location is also ideal because 70% of the North American polyethylene market is within a radius of 700 miles,” she added.

Shell clearly has been aided by the global petrochemicals operating environment, but portfolio re-shaping has helped it push returns higher among those of its peer group.

This has been a long-term goal for the group. In the late 1990s, the company had 130 chemicals sites. Currently, it has 15.

In the third quarter, the energy major’s chemicals earnings were achieved with an average plant availability of 88% compared with 93% in the third quarter of 2016.

This was mainly due to unplanned downtime at the Moerdijk complex in the Netherlands, and unplanned shutdowns in Pernis, also in the Netherlands, and at Deer Park on the hurricane-hit US Gulf Coast.

Shell said it expected increased plant availability in the fourth quarter based on improved operational performance at the Palau Bukom complex in Singapore and lower maintenance compared with the fourth quarter of 2016.

Uhl said that Shell was focused on operational expenditure and operational performance as key measures for success in chemicals.

“This drives our aspiration for this business, where we look to contributing $3.5bn to $4bn of earnings annually by the mid-2020’s,” she added.

Shell said in October that that would be based on a cash flow of between $5bn and $6bn and a base capital spending run rate of between $1bn and $1.5bn.